“It is a plan for your generation,” Ghilarducci said. “It works best over a working lifetime. Even though we olds have not given the young a lot of gifts, you do have the gift of youth. And if you start saving now, you have to save just a lot less of your income than our friends, who have nothing, who have to save almost 50%. So, it’s a gift to mandate that you save on top of your Social Security.”

In short, their plan is for a Guaranteed Retirement Account (GRA) that would be required for all workers without a pension plan, from an Uber driver to a company CEO. The workers and their employers would each contribute 1.5% of wages into these guaranteed accounts. For high-income workers, contributions are capped at $3,750, or 1.5% of a $250,000 salary. Employers are also only required to pay the 1.5% of the first $250,000 in wages. Workers and employers can contribute a higher percentage if they choose.

The plan would also create a new $600 federal tax credit for all savers, making it so someone earning $40,000 or less would see their contribution offset by the credit. Employers can also deduct their share of GRA contributions.

A list of approved asset managers would manage the guaranteed accounts and invest in longer-term strategies with a goal of generating pension-like returns. Upon retirement, the plans will pay out a lifelong annuity for the retiree and their spouse.

A broken system

Ghilarducci and James argue that the current system is broken and if it continues the U.S. should brace to see rates of poor senior citizens not seen since the Great Depression. They estimate that by 2050, nearly 25 million retirees will be in poverty or near-poverty.

Nowadays, to sustain a “comfortable” and “middle-class” lifestyle in retirement, a retiree will need about $375,000 in savings. The reality is that most folks fall far short of that number. The median account balance for folks ages 40 to 45 is $14,500, about one-twentieth of what’s needed, James points out.

The main problem with the current system is that people are on their own to cobble together a plan for a secure retirement. People are living longer and they’re saving less. Social Security and 401(K) plans aren’t enough.

Social Security used to provide 40% of what was needed to maintain middle-class lifestyle; now it’s in the 20s, James noted.

Blackstone COO Tony James and labor economist Teresa Ghilarducci have authored a plan to save the U.S. retirement system.

Another problem with the current voluntary system is that not everyone has a 401(K) plan. In fact, almost half of U.S. workers don’t have one. And for those that do, they might not be participating, they contribute too little, or they pull out money too early. Plus, it’s paid out as a lump sum, so the retiree has to manage that money for the remainder of their life. With life expectancies increasing, that might not be enough.

“So this is a problem that actually is getting worse and worse,” James said. “So the younger you are, if you will, the bigger the problem you’ll have out in the future. And like so many things in America it’s slowly unfolding. America is great at responding to crises, but these long slow incremental problems, we have a tendency to kind of keep kicking the can down the road and waiting until it is a crisis.”

The problem is that the longer the U.S. waits, the more expensive it becomes to try to solve.

“It won’t just be costs in terms of deficits and higher taxes. It’ll tear the social fabric of America apart,” James said. “The irony about that is if we focus on now and start worrying about your generation now with little bits and picks we can solve the problem in a very painless way.”